Commodity ETFs: What the Other Bear Market Means for Your ETF Investments

Stocks have been fighting off the bear for nearly a year already. First, the damage seemed to be contained to the financials. Then it spread to U.S. companies, particularly those engaged in the selling of consumer goods, real estate, airlines and industrials.

By mid-March, the bear had mauled most of the globe. You couldn't look to Asia or Europe for refuge, as both seemed to be "coupling with the U.S." rather than "decoupling from the U.S."

Naturally, there were exceptions. Resource-rich nations from Brazil to Russia bucked the general trend... for a while. Yet global recession fears and inflation concerns eventually claimed Russia (RSX) and Latin America (ILF) as well, both of which are more than 20% off their highs.

About the only thing left to invest in... on the long side, anyway... was "stuff." The commodity bull market seemed nearly untouchable.

At the peak in July, oil was pushing $150 per barrel. Gold was making yet another run at $1000 an ounce. And the hoarding of food seemed to push the Powershares DB Agriculture Fund (DBA) still higher.

Maybe it coincided with the White House talking up an end to the offshore drilling ban. Or perhaps it is a function of the bottoming out in financials. Regardless, investors began dumping United States Oil ETF (USO), the SPDR Gold Trust (GLD) and the Powershares DB Agriculture Fund very quickly.

Although many commodity tracking ETFs remain slightly above official bear markets... that may change today. Once again, commodities of all types are free-falling.

My favorite diversified look at the asset class is the Dow Jones AIG Total Commodity ETN (DJP). To look at it clinging to $60 when $73 was the price just one month prior... the bear's got its claws in one of the few remaining bastions of safety.

There's simply no easy path to success in bears. Many will extol the virtues of "cash being king." And there's wisdom in those hills.

At the same time, I've witnessed far too many investors make the mistake of holding cash positions for far too long... letting fear dominate for years/decades. Even seasoned pros will wait because the economy seems dicey, or oil prices seem high, or the Fed's going to raise rates, or a broad market indicator hasn't yet climbed above a technical, 200-day trendline. In other words, far too many investors will find themselves holding extreme levels of cash... and they won't genuinely buy until the Dow is likely 1500/2000/2500 points higher than it is today. (And even then...)

Investing involves risk -- risk with reward potential. One method of dealing with the uncertainty in the marketplace is by incrementally purchasing into select areas of the market... areas that you feel will recover in time. Perhaps it is technology, energy, financials... or key commodities.

Even if you fear that the markets are headed to Dow 10,000, you would likely benefit from an incremental purchasing approach. You could divide the next 12 months into 8-10 pieces and put cash to work in equal intervals.

Why will this work in your favor? It'll work because we are already in a bear that is at a 20% discount from 10 months ago. With the average bear running about 16 months long, you'd likely pick up some lower prices on further market deterioration... a positive entry point. And you'd likely get a number of higher prices than at present, yet your comfort would rise alongside an appreciating market.

Cash may be king... and there's no doubt that a current high cash position is warranted. I certainly have one at the present.

Yet Warren Buffett's best guidance still holds; that is, "try to be a little greedy when everyone else is fearful." Take some risk... but take it incrementally.

Would you like to learn more about risk management techniques? Then read up on "Managing The Bear With Low-Correlating Assets."

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[phdinsuntanning]

short is king now